Reliable rumors or insider trading?

TEXT OF INTERVIEW

KAI RYSSDAL: The biggest winner on Wall Street today — by a good measure, too — was Hilton Hotels. Shares jumped more than 26 percent. Today was the first U.S. trading day after we learned Blackstone, the private equity group, will be buying the hotel company for $20 billion.

But that's not quite the whole story. As seems to happen so often with these kinds of deals, there are reports today of some unusual activity before the announcement. As in people who knew something was brewing snapping up shares at what turned out to be a bargain.

Jim Angel teaches business at Georgetown University. Good to have you with us.

JIM ANGEL: Why, thank you, Kai.

RYSSDAL: Isn't this why we have the SEC? To stop things like this from happening?

ANGEL: Right. One of the things the SEC was designed to do was to prevent and prosecute fraud in financial markets. Congress gave them a very broad mandate in Section 10-B5. They said, "Hey, any kind of fraud is bad. Go get 'em."

RYSSDAL: And yet, here we are with, not just Hilton but Dow Jones not too long ago. I mean, you could do a Lexus Nexus search back a year and you'd come up with dozens of these things where there's word of a merger and then three days later, oops, look at that — insider trading. Or, you know, an unpredictable bounce in trading.

ANGEL: Well, insider trading is a very difficult crime to prevent and to prosecute. More recently with these big deals there are more and more people involved in the deals. And the more people who are involved in advance, the more chances something's going to leak out. When it does take place, it's hard to prosecute. So, in order to be convicted of insider trading, you've either gotta be an officer or a director of the company and obviously violating your duty to your shareholders. Or, you know you're using stolen information. Now, the problem is, just because you see somebody trade, you don't know exactly what they knew and how they knew it. And that's where the prosecutors have problems, in that it's very hard to prove that Person A actually knew something when they traded.

RYSSDAL: All right, so what are we supposed to do now? Because the people who bought Hilton on Tuesday morning and then saw the bump when word leaked out on Tuesday night — and then follow-on trading, I'm sure, in overseas markets where it bumped again — I mean, they're sitting quite pretty now.

ANGEL: Actually, they should be sitting quite nervously right now. Because, with such a large run-up in such a high-profile case, they know that the investigators are going to be looking at this. And so, they should be expecting a very unpleasant phone call from the SEC. And they should be scurrying right now to get the best defense attorneys they can afford.

RYSSDAL: So, this case, the Hilton case, will bubble along in the newspapers for a while, as have all the other cases. And the, at some point, 18 months down the road, you'll read of somebody paying a $25,000 fine. Is that really pretty much it? I mean, is that what happens?

ANGEL: What I tell my students when they ask me these hypothetical questions about insider trading . . . I stop them right there and say, Hey, I'm not an attorney. The law is vague. You talk to three attorneys, you'll get six different answers. But, if you get onto the SEC's radar screen, the attorneys fees to defend yourself will more than outweigh any gain on that trade. So, don't do it.

RYSSDAL: James Angel, at the School of Business at Georgetown University. Professor, thanks so much for your time.